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(Kitco News) - Stubborn inflation is forcing central banks worldwide to maintain aggressive monetary policies; while this could be a short-term drag on gold, some analysts also note that it supports prices in the long run.
The latest Consumer Price Index numbers from the U.K. shows that inflation remains a global threat. Wednesday, the Office of National Statistics said that headline inflation in the last 12 months rose by 8.7% in May, unchanged from April's increase. Economists were looking for inflation to rise 8.4%.
At the same time, core inflation, which strips out volatile food and energy prices, rose 7.1%, coming in hotter than expected. According to consensus estimates, economists were looking for core inflation to remain unchanged at 6.8%.
The inflation data comes a day before the Bank of England is expected to raise interest rates. Economists have noted that as consumer prices remain elevated, the BoE will have to maintain its hawkish stance longer than anticipated, increasing the risk of the economy falling into a recession.
“These numbers warn that inflationary pressures in the UK are not under control and call for further rate hikes, which will further squeeze the British households, without a guarantee of easing inflation. We will see what the BoE will do and say tomorrow, but we know that they now have a few doubts regarding the reliability of their inflation model, which was pointing at a steep fall in H2 this year – a scenario that is unlikely to happen," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank in a note to clients.
While the inflation threat in Britain is unique and has been stubbornly high for more than a year, the nation is not alone in its struggles. Inflation in the U.S. has dropped sharply from its 40-year highs last June but still remains well above the Federal Reserve's 2% target.
Wednesday, in his Semiannual Monetary Policy Report to Congress, Federal Reserve Chair Jerome Powell said that the Committee still has a long way to go before inflation is under control. He added that the Committee also sees further rate hikes by the end of the year.
The eurozone sees a similar inflation threat even as falling energy prices are helping to ease the pressure. Last week after raising interest rates across the board by 25 basis points, ECB President Christine Lagarde said the central bank expects to raise interest rates again in July.
Lagarde said that the journey to bring inflation back to 2% is not over and that the ECB still has ground to cover.
While central banks are maintaining their hawkish biases, some analysts have said that it is unlikely they will be able to get inflation under control without breaking the global economy and financial markets.
Analysts have noted that inflation remains a global issue that no one central bank will be able to fix on its own. This global threat is what will continue to support gold prices, according to some analysts.
In a recent comment to Kitco News, Colin Cieszynski, chief market strategist at SIA Wealth Management, said that gold, while under pressure, continues to show relative strength in the current hawkish environment.
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“My thinking is that this may be because several central banks have blamed sticky inflation for taking more hawkish stances than expected this month, and gold's historical role as an inflation hedge may be starting to reassert itself," he said.
In an interview with Kitco News, Ole Hansen, head of commodity strategy at Saxo Bank, said that while central bank positioning could weigh on gold soon, he remains bullish on the precious metal.
He added he still expects stubborn inflation will force central banks to adjust their inflation targets, which in turn would cause a massive repricing in inflation-weighted bonds, supporting gold prices.
He added that gold prices could quickly go back above $2,000 an ounce when this happens.
Michele Schneider, director of trading education and research at MarketGauge, said she sees potential for gold prices to go higher as food prices are expected to remain elevated.
